Less Pollution, Fewer Crashes: The Impacts of Green Credit Policy on Stock Price Crash Risk

Abstract

We use the implementation of “Green Credit Guidelines” as a quasi-natural experiment to examine its impact on high-pollution firms’ stock crash risk. By applying a Difference-in-Difference (DiD) model to a sample of Chinese listed firms from 2009 to 2016, we document that high-pollution firms’ stock crash risk increase significantly after the passage of the policy. Channels to explain the association are investigated. Since high-pollution firms are less likely to receive the “green credits”, their financial constraints increase. It motivates these firms to hoard more firm-specific negative information and as a result, high-pollution firms are covered with fewer analysts, attract less media attention, and are more likely to be shorted after the policy. The increased information asymmetry between the corporations and the investors lead to a higher level of crash risk. In addition, we show that the impact of the policy is more pronounced for high-pollution firms which are state-owned enterprises, located in areas with better legal and market environment, or in the eastern provinces. Further, our study suggests that high-pollution firms should follow the government’s initiative and transfer themselves into more environmental-friendly enterprises. By doing that, these firms could stabilize their stock prices and thus decrease the stock crash risk.

Keywords: Green Credit, Crash Risk, Information Asymmetry, DID Model

JEL Classification: G10, G14, G23